The worst of the sell-off is still to come, according to Piper Sandler. Analysts at the investment bank continue to see pain ahead and don't expect stocks to bottom until next year, even as prevailing bearish sentiment may have some investors ready for a contrarian bounce. "We anticipate continued risk-off leadership over the next 12-15 months, we think that U.S. recession risks will rise all year, and we believe the stock market will not reach its low point until 2023," analyst Michael Kantrowitz wrote in a Tuesday report. "We have a TON of conviction in this call." Kantrowitz pointed to several signs that a prolonged market decline may be coming. One of them is the fact that the S & P 500 High Beta Index has not priced in recession risks. The analyst pointed out that the high beta index is down more than 22% relative to the S & P 500 Low Volatility index. However, the high beta benchmark "has gone down a LOT more in recent slowdowns or recessions," suggesting that "we've only just begun to discount the slowdown." Another signal investors should watch, according to Kantrowitz, is the "classic lag" between the Federal Reserve raising rates and leading indicators such as purchasing manager's indexes (PMIs) bottoming. The way things stand right now, PMIs are unlikely to bottom until mid-2023 at the earliest, Kantrowitz said. He also said that, the more PMIs fall, "the more we'll see [earnings per share] expectations decline." "As the weight of evidence increases, which always begins with leading economic indicators and ends with lagging indicators, market volatility will likely increase," Kantrowitz wrote. "History shows that when lagging indicators begin to decline, the worst market performance occurs. We are almost there today." While the firm does not see a strong bull case for stocks, it believes that any moderation of inflation fears could give equities a lift. However, such bounces are unlikely to last should growth fears take over. The investment bank was especially bearish on small-cap value, transportation and machinery stocks. Stocks have been under pressure this year, as inflationary pressures not seen in decades and tighter monetary policy have dented market sentiment. Year-to-date, the S & P 500 is down nearly 17%.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, March 22, 2022.
Brendan McDermid | Reuters
The worst of the sell-off is still to come, according to Piper Sandler.